>> Publications

Macroeconomic Policies, Foreign Direct Investment and Emerging Economic Sectors in Tanzania

Published: 2 December 2021

Downloads

Executive Summary

Introduction

This report presents findings of a study on the effect of macroeconomic policies on emerging sectors in Tanzania based on an in-depth analysis of the effect of macroeconomic policies on Foreign Direct Investment (FDI), regional integration, and emerging sectors of horticulture, digitalization and the green economy (see Figure 1.1 below). The aim was to document main achievements, best practices and lessons learned. This study was largely built on a review of the literature including national surveys, sector reports, annual reports from different stakeholders, studies and information issued from the World Bank, Bank of Tanzania (BOT), Tanzania Revenue Authority (TRA), Ministry of Finance and Planning (MoFP) and National Bureau of Statics (NBS). Apart from that, the study team made field visits to check on the reliability and consistency of the secondary data and reports and obtain additional/updated information. In the field, Key Informant Interviews (KIIs) were conducted with stakeholders from the central and local government in Dodoma region, TRA, the National Bureau of Statistics (NBS), and private sector representatives such as the Tanzania Chamber of Commerce, Industry and Trade (TCCIA). Apart from that, surveys and Focus Group Discussions (FGDs) with horticulture farmers in Iringa and Arusha regions, manufacturers, and SMEs, including women and youths in Dar es Salaam and Mwanza regions were also conducted.

Foreign Direct Investment (FDI)

Framework

The major framework for FDI is the Tanzania Investment Centre (TIC) in 1997 which was followed by the passing of the Tanzania Investment Act, 1997. In addition to that, conflicting laws and regulations has been rectified and made clearer and easier to interpret. These include the Mining Act, 1998; Tanzania Revenue Authority Act, 1997; the Land Act, 1999; Financial Laws Miscellaneous Amendments Act, 1997; and Investment Regulations (2002). Moreover, the government designed tax incentives to attract more FDI to encourage labour-intensive, export-oriented industrialization and employment generation, particularly in the mining sector. Several other related policies and programmes were also introduced, notably the Special Economic Zones (SEZs) for the attraction of export-oriented FDIs.

Until the mid-nineties Tanzania played a leading role in the region in attracting foreign capital. This trend continued to 2000 whereby the value of FDI in Tanzania reached 463.4 US Million. Foreign Direct Investment continued to play a decisive role in the performance of the Tanzanian economy whereby in 2005, FDI contributed to 5% of the GDP. From 2010 to 2015, the rate of FDI in Tanzania ranged between 1.8 USD Billion and 1.6 US Billion making it the leading the country in the East African region in terms of the inward investment. Nonetheless, from 2016 to 2019 statistics indicate a significant drop in the volume of capital inflows. Tanzania’s ability to attract FDI has declined both in absolute terms and in relative terms.

Gaps and Key Lessons

  • Tanzania’s fiscal system is characterized by many taxes and tariffs in comparison to neighbouring countries.
  • Tanzania has restrictions for FDI in sectors considered strategic. These include aerospace, construction and heavy equipment, travel and tourism, energy and environmental industries, information and communication, and publishing, media, and entertainment.
    Costs of business initiation and operations can be high, as they include investment related to infrastructure, exportability, labour issues, and tariffs.
  • Despite several reforms made by the government to improve the country’s business environment, including the implementation of a blueprint for regulatory reforms since 2018, foreign investors are still not satisfied with the current business environment.
  • A survey by Jahari (2021) showed that foreign investors expressed general dissatisfaction with immigration and labour systems, tax administration, and the availability of specialist competencies.
  • Tanzania’s investment regime for FDI focuses on the extractive industry. The danger of this is that these resources will get depleted and hence to promote diversification, Tanzania should opt for targeted investment incentives, giving priority to incentives in the emerging sectors.

Recommendations

  • A complete overall of the tax system in Tanzania is required. This will enable the government to ensure the tax structure is competitive, widen the scope of tax incentives; ensure that only one institution provides incentives; improve tax dispute settlement with foreign investors, and integrate different contradicting tax laws. This will also ensure fiscal policy stability.
  • Establishing a policy that will allow TIC to have land banks for foreign investors.
  • Designing and implementing strategies and measures to promote outward FDI especially in EAC and SADC countries to take advantage of the regional integrations.
  • Harmonization/integration of all tax and tariff systems to enable investors to pay to only one collecting agency such as TRA.
  • The continued dialogue between the government, regulatory agencies, and the private sector are necessary given their mutual interdependence.

Horticulture

Framework

Recognizing the important role agriculture plays, in 2006/2007 the Agricultural Sector Development Plan (ASDP) was launched. For the implementation of ASDP, the “Kilimo Kwanza” was developed. “Kilimo Kwanza” aimed at fostering the modernization and commercialization of agricultural sector for small, medium and large scale producers. Moreover, SAGCOT was designed as an important instrument to implement “Kilimo Kwanza” through mobilization of private sector investment. Another important policy is the National Agriculture Policy (2013). Over a decade, the horticultural industry has been one of the most dynamic agriculture subsectors growing at a rate of 8%-10% per annum and contributing to more than USD 354 million per annum of the country’s economy. The horticulture subsector employs about 450,000 Tanzanians, majority being women (about 65%-70%). The value of horticulture exports have increased from 412 USD million in 2015 to 779 USD million in 2019. In order to harness the horticulture subsector, the government formulated the National Horticultural Development Strategy in 2012. Recent measures include exemption of import duty for importation of cold rooms by a horticulture trader.

Gaps and Key Lessons

  • One of the many burdens in the horticulture subsector is the tax burden. A comparative analysis shows that Tanzanian’s horticulture subsector is highly taxed which threaten its competitiveness. The tax burden for the horticulture subsector in Tanzania is 30 %t higher than Uganda and two times higher than that of Zambia.
  • Securing land for commercial horticulture for large scale farmers is one of the crucial gaps in the horticulture subsector, especially for foreign investors.
  • Sanitary and phytosanitary measures are very important issues in the horticulture trade especially for the European market. To get access to the European market, exporters must have a Global Gap Certificate which requires lab tests of the produce. However, most horticulture exporters use Kenyan labs because labs in Tanzania are inadequate and the few available ones like SUA and Mikocheni are not internationally accredited and produce inaccurate results.
  • The horticulture sector is extremely technical and hence requires a lot of technical knowledge to enhance productivity and quality for export purposes. Low levels of education and literacy among most horticulture producers contribute to low production and low quality of produce.
  • Horticultural exports account for less than 10% of the total horticulture production in the country.
  • Around 50% or more of horticultural produce is lost during postharvest especially for smallholder farmers.

Recommendations

  • Improving airport services necessary to facilitate the export of horticultural products. These include adequate availability of cold rooms, preservation facilities, aircraft etc.
  • Expanding international market opportunities other than EU countries.
  • Revising the tax structure to remove uncompetitive taxes.
  • Establishing land banks at Tanzania Investment Centre (TIC) to facilitate easy access to investment land by foreign investors.
  • Strengthening the role of the Tanzania Bureau of Standards (TBS) by constructing more laboratories of high standards and improving capacity on the inspection of the product at entry and checkpoints.
  • Improving monetary policy transmission channels by introducing legal mechanisms in contract farming, out-grower schemes, and warehouse receipt systems.
  • Upgrading domestic marketing infrastructure and facilitating services for traditional participants in the system.

Digitalization

Framework

Digitalization is an essential tool for developing nation’ s economic success. The government approved a nation Information and Communication Technology policy in the year 2001. The implementation of the policy started with establishment of the National Information Technology Development Agency (NITDA). In the past decade, Tanzania is among the six second tier (i.e. Ghana, Morocco, Senegal, Tunisia, Uganda and Tanzania) accounting for over 20 percent of the Africa’s total digital entrepreneurship activity. Moreover, Tanzania accounts for 29 percent of internet use on the continent. Internet users have increased from 17 million people in 2015 to 25 million people in 2019, accounting to 34% of the total population (TCRA data). In part, internet expansion has been driven by falling costs of mobile handsets. For example, in the financial year 2020/2021, the government has removed import duty on mobile handsets.

Gaps and Key Lessons

  • Though Tanzania is reported to have fast and large internet penetration individual Internet penetration is relatively low at around 28.7% and mostly in urban areas, although the target is to grow the country’s Broadband penetration to 70% by 2025. Tanzania ranks 112th out of 137 countries in The Economist Intelligence Unit’s Technological Readiness Ranking for 2018.
  • The inefficient of broadband plan may be affecting the country’s capacity to make reasonable progress in terms of the digital economy and diversification plan by the current government. In the span of five years, Tanzania continues to be ranked among countries with the lowest broadband penetration in the world.
  • Although the situation on the ground is improving, internet connection in Tanzania remains relatively expensive, slow and/or not always readily available. For example, Dar es salaam is one of the most expensive internet bandwidth in Africa; both locally and internationally.
    In terms of local content and patents, Tanzania ranks 122 out of 137 countries surveyed by the Economist Intelligence Unit’s Technological Readiness Ranking in the year 2018, with zero value of local content and patents. Tanzania’s digital sector is growing, however, the government lacks coherent and clear digitalization strategies.
  • Inadequate legislative framework to protect the rights of entrepreneurs and support their business development. Burdensome regulations, untransparent and time-consuming procedures, red tape and high tax burdens hinder the capacity of SMEs to flourish, grow, access funding and digitalize.
  • The size of the shadow economy is an important factor inhibiting digitalization efforts. As pointed out by some interviewees, many SMEs do not wish to be formalized and prefer to remain in the informal sphere so that they do not have to pay taxes and deal with the state bureaucracy. As a consequence, they do not want to go online in any way in order to remain outside of the state’s supervision. Those SMEs that might wish to digitalize, oftentimes face difficulties accessing funds.
  • Due to the low level of tax revenue, the government sees the ICT sector as a source of tax revenue. Internet penetration, smartphone subscriptions, and online transactions increase. However, the government must ensure its approach to taxing ICT is consistent and transparent, and its need for public revenue is entirely legitimate. The question is whether it can increase revenue-raising without deterring capital investment. In Africa, the main focus has been on the taxation of internet and mobile money users. While this kind of taxation may be attractive, it can result in to decline in economic activities by reducing the number of active internet users.

Recommendations

  • The government should increase e-government and e-administration services and the digitalization of public administration, which would help to simplify and increase the transparency of administrative procedures and facilitate access for the populations residing in remote areas or having mobility problems.
  • Create incentives for SMEs to digitalize, e.g. by moving their invoicing online. This could be done by virtue of the creation of tax incentives (lower tax rates for SMEs going digital) or offering grace periods for previously unregistered SMEs that choose to exit the grey economy and go digital. It is also important to ensure that e-services are easy to use and do not require the purchase of expensive equipment or software.
  • While working with government on digitalization-related projects, development partners should promote the inclusion of LGAs, e.g. by virtue of conducting pilots on governorate or municipality levels in coordination with relevant sub-national authorities.
  • The government should facilitate the process of creating or strengthening adequate social and regulatory protections for workers engaged in non-standard work practices based on digital technologies. This includes producing guides to registering and licensing small businesses such as micro-entrepreneurs selling their home-made meals via online platforms or maintenance service providers advertising to clients on dedicated online platforms.
  • Intervene in the local educational system: update educational programmes or provide specific training on subjects like communication, critical thinking, customer service, STEM (Science, Technology, Engineering and Mathematics) and coding.
  • a National Artificial Intelligence Strategy (NAIS) be launched in Tanzania to strategies the country to move towards an industry economy and beyond as envisioned by TDV 2025.
  • Improve connectivity and access to fast, reliable and affordable broadband in the country, including in rural areas and other regions and municipalities with a non-existent or slow broadband connection.

Green Economy

Framework

The concept of green economy has emerged recently advocating for holistic and programmatic approach among 3 pillars of sustainable development- economy, social welfare and the environment. Tanzania has no formal specific national policy or strategy on green economy. However, the country has a significant number of development framework and sectoral policies, plans and strategies which address many of the elements of green economy sustainably. These include: the National Environment Policy (NEP, 1997); the Environmental Management Act, 2004; mainstreaming the environment into the national strategies such  as the  Five Year Developing Plans (i.e. FYDP I, II and III),  the then national strategy for growth and reduction of poverty (MKUKUTA);  mainstreaming the environment into sectoral legislations policies and strategies; and ratifying various global and regional conventions of relevance to the  environment and sustainable development.

Gaps and Key Lessons

  • The National Environmental Act has constituted a milestone in national environmental policy, a major effort to systemize and improve the nature protection regime in the country, laying out the frameworks, mechanisms and aspirational targets. However, follow-up to the Environmental Act has been much slower and less ambitious.
  • The government has not been able to meet the Five Year Development Plan (FYDP II) environmental targets such as: (i) energy driven from renewable resources to be 50% or higher by 2021; and (ii) natural forest cover to be 130,000 ha or larger by 2021. For example, by 2019, Tanzania had the highest annual forest net loss area in East Africa and the 5th highest annual forest net loss in the World with the area loss of 372,000 ha/year.
  • Another existing policy gap is inadequate involvement of Micro, Small and Medium Enterprises (MSMEs) in the green economy agenda
  • Tanzania is endowed with abundant, high quality renewable resources, much of which is untapped. Despite that, renewable energy account for only about 4.9% of generation capacity of which the major share derives from biomass.
  • The present-day economy is heavily based on the predominant industrial development, with disproportionately higher incentives in traditional economic sectors such as oil and gas. Since the government has now decided to choose a greener path, that structure of incentives (direct and hidden) will need to change.
  • The level of public awareness regarding green economy transition is very low in Tanzania.
  • The GE Concept does not fully cover government expenditure reform and does not outline a path for restructuring of subsidies in key economic sectors.

Recommendations

  • Subsidies and other incentives will need a thorough review. Tariffs and subsidies should be restructured so that the economic signals are right for green growth, addressing social impacts as well as environmental, and integrating necessary social protection mechanisms and green re-investment.
  • Integrating Extractive Industries Transparency Initiative (EITI) approaches into a wider range of economic activities.
  • Promotion of “green” products is also important. The schemes need to be backed with a strategy to boost demand for certified products while retaining the appropriate degree of rigor in the standards and assessments.
  • Undertaking adequate advocacy programmes for mindset change of the public, investors, and decision makers.
  • Standards, enabling technology access.

REGIONAL INTEGRATION

Framework

Regional integration in Tanzania has developed over a number of years whereby Tanzania is a member to two main integrations; the East African Community (EAC) and the Southern African Development Cooperation (SADC). In addition, Tanzania is a member to The Tripartite Free Trade Area (TFTA) and Continental Free Trade Area (CFTA). At the political level, the government is supportive of regional integration initiatives. The ministry of foreign affairs and East Africa Community is a key player in fostering implementation of the regional cooperation agreements. Tanzania has been generally successful in achieving the macroeconomic convergence targets for deepening integration.  The country has already pursued a sound monetary policy that has kept inflation at low and stable rates. The country’s inflation target has been set at 3-4% in the past five years.  This target, which is less than the EAC targets and has met SADC targets over most of the period. The country has also maintained a sound fiscal policy stance geared towards having low budget deficits and low debt to GDP ratio. The country has maintained a strong balance of payments with the level of international reserves well above the 4 months imports cover target. The current account deficit has never been greater than the 9 % of GDP target limit. The country’s external debt as a percentage of GDP has been declining over time. Tanzania has also been able to achieve the 25% of GDP target for saving, with a current savings ratio of about 34%.

Gaps and Key Lessons

  • Most of the macroeconomic convergence activities are scattered amongst the different institutions leading to coordination problems.
  • Tanzania’s economic performance depends on few sectors particularly the mining sector. As such, Tanzania’s macroeconomic convergence programme is quite sensitive since changes in many of the other variables are highly aligned to the mining sector’s performance. Diversification is highly recommended.
  • The objectives of regional integration in the various agreements overlap and, as such, it is imperative that research be carried out on the possible benefits and the impact of the agreements on the country’s long term trade aspects and developmental aspirations.
  • Weak capacity for advocacy and public relations on issues related to regional macroeconomic integration.

Recommendations

  • The government efforts to promote investments, both local and foreign, should be more selective, focused on investments that are local-resource based or whose outputs are targeted at export markets.
  • Prioritize the regional integration agenda in the FYDP III (2021/2022-2025/2026) in order to increase the country’s response mechanism to understudy regional laws, protocols and policies to reduce the time to decide on each framework and ensure timely signing, ratification and domestication.
  • Industrial development should also form one of the priority areas for Tanzania. This can contribute to more production and products in the market and enhance Tanzania ’s export profile, which is imperative if Tanzania is to compete successfully in the regional integration process and benefit from trade.
  • Formulating an independent the Ministry of Regional Integration for it to effectively coordinate and popularize the integration agenda in a succinct manner, and enable Tanzanians take advantage of the opportunities this creates.
  • Eliminating tariffs to intra-African trade in agriculture through the CFTA would be a key factor as trade in agriculture faces a higher rate of protection than non-agricultural sectors.

Lead researcher

  • Dr. Kaihula Prudensia Bishagazi a lecturer at Saint Augustine University of Tanzania (SAUT) and a consultant in policy reforms. She has been involved in several consultancies on policy advocacy and Public Private Dialogues (PPDs).

Downloads